Question

Problem 3 (Ricardian Model):

Two countries, Alia and Palia are closed to international trade. Alia has 1800 units of labor available, and Palia has 900 units. Both countries can produce two goods, skis and snowboards. Alia’s unit labor requirement in skis production is 3, while in snowboards production is 2. Palia’s unit labor requirement in skis production is 5, while in snowboards production it is 1.

a) Graph Alia and Palia’s production possibility frontier.

b) Compute Alia and Palia’s opportunity cost of skis in terms of snowboards. Explain.

c) In the absence of trade, compute the price of skis in terms of snowboards in Alia and in Palia. Assume that consumers in each country like to consume both goods. Explain.

d) Assume now that the two countries open to trade with each other. Which country has comparative advantage in skis? And in snowboards? Explain.

e) Construct the world relative supply curve. Show it in a graph.

Answer 1